Few enjoy paying insurance premiums.
But it's good news for premium payers when investment returns run higher than expected — and at the same time claims run low enough for an insurer to distribute what is deemed surplus.
That's the situation at the Minnesota Workers' Compensation Reinsurance Association (WCRA), a low-profile, state-mandated nonprofit business that plans a record $600 million distribution to customers, its first since 2000.
This is a turnaround story. In 2009, about 100,000 policyholders were assessed nearly $268 million over five years to reduce a $423.7 million capital deficit. The association had lost a quarter of the value of its investment portfolio to the Great Recession stock market dive.
Earlier this month the state Department of Labor and Industry and Department of Commerce approved the record distribution. About $383 million will go to insurers who purchase reinsurance to cover catastrophic claims, $182 million to self-insured companies and $35 million to policyholders. The policyholders are more than 100,000 employers with workers' comp policies.
The association boasted $1.9 billion in capital in 2020, according to its audit, with total income of $508.6 million, including $52 million in premium income. The balance came from investment income and gains.
CEO James Heer, an insurance industry veteran who began at WCRA as the association's chief actuary in 2007, cited several reasons for success.
Investment returns, how an insurance company makes most of its money, have averaged 10% over the last decade, compared with expected returns of 6.5%. The portfolio, invested to match the long-term liabilities of an insurer, is allocated 70% to stocks and 30% to bonds.
"And our estimate of projected future payments has come down due to reduced medical-cost inflation and reduced frequencies of claims," Heer said. "That's a long-term phenomenon that's not unique to Minnesota work comp. It's improvement in safety technologies, safer workplaces and vehicles. And safety and risk-management programs."
Recent Minnesota legislation also changed the medical reimbursement formula for hospitalization under workers' compensation.
"It's linked to Medicare," Heer said. "We pay more, but it slowed the rate of growth of reimbursement to hospitals.''
The WCRA says it provides Minnesota insurers and self-insurers "affordable, accessible and superior reinsurance protection against catastrophic workers' compensation claims."
The Minnesota Legislature created the association in 1979 amid some controversy, when insurers stopped writing workers' compensation and reinsurance policies because of affordability issues. WCRA says it sets "fair and reasonable rates to Minnesota employers."
There is no direct state subsidy.
CEO Terrence Miller of SFM Mutual, Minnesota's largest writer of workers' comp insurance, is chairman of the WCRA board.
"We look at capital once a year, and it has grown because of returns growing and the reduction and frequency of claims [declining],'' Miller said.
"When you look at the amount WCRA has returned to its members and Minnesota employers in distribution and reimbursements for claims, that's much greater than premiums collected," Miller noted. "It's hard to argue that [WCRA] has been a bad investment. It's working."
Workers' compensation reinsurance is designed to protect an insurer or self-insurer against catastrophic losses from work-related injuries. The insurer is responsible for indemnity and medical benefits up to a selected deductible level, or "retention limit."
Once the retention limit is reached, WCRA will reimburse the entity for claims in Minnesota. The retention limits are indexed to Minnesota wage costs and are updated each year as part of the rate determination process.
The reinsurance premiums are determined by actuarial projections of the number of catastrophic injuries and costs likely to occur in Minnesota's workforce each year. The WCRA board, including industry and state officials, approves the premium rates, a process that also takes in expected investment income and a review of the likely cost of catastrophic claims.
WCRA claims that no other state or private company "provides such comprehensive workers' compensation reinsurance coverage at such an affordable cost."
To an extent, the government intervened 43 years ago because the workers' comp market had become dysfunctional and nobody wanted to back the primary underwriters. Inserting a government-backed reinsurer calmed the market over time, on top of subsequent cost-cooling reforms in workers' comp insurance.
"The WCRA continues to successfully fulfill its mission in contributing to a healthy workers' compensation system," Heer said.